At the end of 2018 there was almost unprecedented enthusiasm about the potential for the IPO market in 2019. Several household technology names were rumored to be preparing to list as soon as Q1, and a few of them had already disclosed that they had filed an S-1 confidentially with the SEC. The prevailing 2019 outlook was that public listings would continue to build momentum, and that, hopefully, this year would be the biggest for IPOs since the recession. This expectation was backed up by everything we were seeing and hearing from our clients. As of early December, 20 clients had gone public on Shareworks and we had every reason to expect another 10 companies to list in Q1 of 2019. Needless to say, things are looking very different now.
While it may be anyone’s guess as to when the current government shutdown will end, the backlog at the SEC is already causing chaos in the IPO market. The securities regulator is operating at severely reduced capacity, and companies are becoming increasingly frustrated as they find themselves unable to move forward with the listing process without SEC input. The IPO process, which until recently had been moving at an unprecedented speed, is heavily reliant on constant discussion between the company, auditors and SEC staff. If the SEC is delayed in responding — or, in this case, not responding at all — the process can quickly grind to a halt. For context, the first two full weeks of December each saw three IPOs price, but thanks to the holidays and government shutdown, there has not been an IPO in the US in close to a month. Meanwhile, competing exchanges in Europe, Asia and even Canada continue to march forward with IPOs on a daily basis.
Contingency planning and IPO alternatives
Given the backed-up IPO pipeline, companies are crafting contingency plans for a prolonged shutdown. While everyone certainly hopes that things will be back on track soon, it is necessary to plan ahead and make sure companies are not exposing themselves. Fortunately, activity is still booming in the private market and there are a number of options to take the IPO pressure off.
If you’ve always considered M&A as either a potential exit strategy or source of liquidity, that’s still the case — provided the deal wouldn’t require SEC approval. Unfortunately, the same factors that are slowing IPOs are causing problems for large M&A transactions as well.
Primary financing (private capital fundraise)
If you’re looking to secure necessary capital in the short term, consider primary financing. The VC environment is still incredibly active, with billions raised only 10 days into the year. You may be able to leverage your IPO bankers to help or simply raise funds from existing investors, but it is always a great plan to have a solid war chest in place when launching an IPO. If investors feel like you are desperate to raise money in the public market, you are putting yourself in a tough spot.
Tender offers & secondaries
One of the largest IPO drivers tends to be existing investors that need to liquidate their positions. These investors (including employees) are usually locked up six months post-IPO, so a meaningful delay in the IPO process due to the government shutdown will put any potential sale well into Q4, if not all the way into 2020. A controlled liquidity event, such as a tender offer or secondary sale, can help relieve the pressure.
A tender offer doesn’t just suit investors looking for liquidity. If you were thinking that your IPO would resolve the challenges of stock option and RSU expirations or major RSU vesting events, running a tender offer or allowing the affected shareholders an opportunity to sell can help mitigate any potential issues. This way, the demand is met on your terms and your shareholders aren’t selling at deflated prices, which can be a negative signal for the eventual IPO.
It’s unknown how long the shutdown will last, or how quickly the SEC will be firing on all cylinders once the government is back to work. Meanwhile, our team is here to help. Whether you need assistance in getting your data IPO-ready, completing a tender offer or M&A event, or simply want to talk through the “what ifs”, drop us a line. We would love to help.
Ryan has been immersed in the private company market for the past eight years and is focused on driving new product offerings for Shareworks by Morgan Stanley’s top private company clients. Prior to joining the organization, Ryan led efforts to help private companies access institutional capital and completed over $20B in complex transactions as the Director of Operations at SecondMarket and the Head of the Private Company Market for Nasdaq Private Market. Ryan received his B.A. from the University of Rhode Island and his J.D. from Northeastern University School of Law.